The Impact of the agricultural sector on cyclical unemployment and output in EU

The purpose of this paper was to estimate changes in cyclical unemployment and output in the EU using an Okun's law equation, extended with a new variable, namely, the share of the economically active labour force of the agricultural sector in the total economy. Treating both the NAIRU and the potential output growth rate as time dependent unobserved stochastic processes, a state-space maximum likelihood estimation method - using Kalman filter where the state variables were random walks - was followed in order to estimate the 15 equations. Overall, the estimated equations suggested that the extent and direction of changes of cyclical unemployment and cyclical output over the period 1961-1999 is mixed across the EU. The paper concludes that the introduction of the share of the agricultural labour force in the determination of cyclical unemployment and output is important and therefore the application of "common agricultural policies" across the 15 EU member states may be questionable because of the different expected effects of these policies on the various economies.